Scale AI’s DOL Investigation Closure Offers Relief, but Legal and Regulatory Risks Linger

The U.S. Department of Labor (DOL) has closed its investigation into Scale AI’s compliance with the Fair Labor Standards Act (FLSA), a move that removes a significant overhang for the $14 billion AI data-labeling giant. The probe, which began under the Biden administration in 2023, centered on allegations that Scale AI misclassified its global workforce of “Taskers” as independent contractors rather than employees, depriving them of benefits like overtime pay and sick leave. While the closure is a relief for investors, ongoing lawsuits and shifting regulatory priorities underscore lingering risks for the company’s business model.

The Investigation Closure: A Win, but Not a Final Verdict

The DOL’s decision to drop its probe without publicly disclosing findings or penalties comes amid a broader pivot in labor policy. In May 2024, the DOL suspended enforcement of a Biden-era rule that made it harder to classify workers as independent contractors—a change that favors companies like Scale AI. This shift, coupled with the closure, suggests regulators are moving toward a more employer-friendly stance.

Scale AI’s CEO, Alexandr Wang, has openly aligned with the Trump administration, attending his inauguration and advocating for U.S. leadership in AI. While political ties alone don’t directly explain the DOL’s actions, the timing and policy changes raise questions about whether the new administration’s priorities influenced the outcome.

Legal Battles Continue: A Cloud Over the Horizon

Despite the DOL closure, Scale AI faces two active class-action lawsuits filed in late 2024 and early 2025. Plaintiffs allege systemic underpayment, misclassification of workers, and violations of state labor laws. The December 2024 case, McKinney v. Scale AI, argues that Taskers lack autonomy over their work and are improperly denied benefits, demanding reclassification as employees.

The lawsuits remain unresolved, and outcomes could force Scale AI to reclassify workers, pay back wages, or settle claims—a scenario that could cost millions, as seen in the $2.1 million settlement by hotel staffing firm Qwick in February 2024. Scale AI has denied all allegations, emphasizing its “flexible work opportunities” and compliance with labor laws.

Regulatory and Industry Context: A Fragile Balance

Scale AI’s business model relies on a global network of 9,000+ cities’ contributors, most classified as independent contractors. This structure keeps labor costs low but puts the company in the crosshairs of regulators and workers’ rights advocates.

While the DOL’s closure is a positive signal, the broader gig economy landscape remains contentious. Similar cases, such as Upwork’s avoidance of DOL scrutiny and WorkWhile’s $1 million California settlement, highlight the volatility of labor classifications. Scale AI’s political connections—such as former managing director Michael Kratsios’s role in the White House—may offer indirect influence, but the company’s legal battles are now in the courts, not the halls of power.

Investment Implications: Risks and Rewards

For investors, Scale AI’s DOL closure removes a near-term regulatory threat but leaves material risks unresolved. The company’s valuation hinges on its ability to scale efficiently, which depends on its low-cost contractor model. A reclassification ruling could force higher labor expenses, squeezing margins.

However, Scale AI’s $14 billion valuation reflects its dominance in AI training data—a critical input for tech giants like Meta and Amazon. The shows strong demand for its platform, which processed over 1 billion data points in 2023.

Conclusion: A Delicate Equilibrium

The DOL’s closure is a tactical win for Scale AI, but the company remains in a precarious position. While the regulatory environment is currently favorable, ongoing lawsuits and evolving labor standards could disrupt its business model. Investors should weigh Scale AI’s growth potential against the risks of a costly reclassification or settlement.

Key data points underscore the stakes:
- Scale AI’s valuation dropped 15% in 2023 amid the DOL probe but has since stabilized.
- Similar cases, like Qwick’s $2.1 million settlement, suggest potential liabilities in the millions.
- Over 90% of Scale’s workforce is classified as independent contractors, a model under legal and public scrutiny.

For now, Scale AI’s closure of the DOL probe offers relief, but the real test lies in the courts. Investors should monitor both the lawsuits’ outcomes and shifts in labor policy as critical indicators of the company’s long-term prospects.